Halyard’s Weekly Wrap
our thoughts on the past week’s market activity, economic releases, and Federal Reserve commentary
09/04/26 – The yield to maturity on 2-year US Treasury Notes is 100bps higher since February 28th, – the day the US and Israel escalated the Iran conflict.
The non-farm payroll total for August was a bit of a shocker, with the economy adding 162,000 new jobs versus the expectation for 55,000. That result exceeded even the most optimistic forecast of 125,000 put forth by a private economic forecasting firm.
In addition, the 23,000 lost jobs that were originally reported last month was revised to a gain of 21,000. The unemployment rate remained unchanged at 4.1%, the lowest it’s been in nearly a year.
Economists caution that the August employment report can be tricky due to impact of local educational employment returning and the staggering of the first day of school for regions across the country. Nevertheless, it’s an undeniable bright spot in an economy that has been grinding along despite the negative headlines of the prolonged war with Iran and persistent inflation.
Other economic data released this week showed the economy continues to grow at a moderate pace with the Job Openings report stable, durable goods sales continuing to grow and the initial claims for unemployment insurance holding steady at the low end of the range.
Given Chairman Warsh’s hawkish comments at last week’s Jackson Hole symposium, this morning’s release makes a September rate hike all but a certainty. The consumer price index, to be released next Friday, could offer some relief as the core year-over-year inflation is expected to fall to 2.4% from the 2.5% recorded in the previous month. But we don’t think that outcome is compelling enough to keep the committee from raising the overnight rate.
In anticipation of the hike, the two-year note is closing just below the 4.40% high set on September 1st. On the other hand, the equity market seems to be sanguine to the idea of a 25-basis point rate hike. For the week, the S&P 500 is nearly unchanged and less than 1.5% below the all-time high set last month.
The pre-FOMC communications blackout period starts tomorrow so any discussion of what the committee may do will be unofficial.
This commentary is being provided by Halyard Asset Management, L.L.C. and its affiliates (collectively “Halyard” or “we”) for informational and discussion purposes only and does not constitute, and should not be construed as, investment advice, or a recommendation with respect to the securities used, or an offer or solicitation, and is not the basis for any contract to purchase or sell any security, or other instrument, or for Halyard to enter into or arrange any type of transaction as a consequence of any information contained herein. Although the information herein has been obtained from public and private sources and data that we believe to be reliable, we make no representation as its accuracy or completeness. The views expressed herein represent the opinions of Halyard Asset Management, LLC, or any of its affiliates, and are not intended as a forecast or guarantee of future results. Past performance is not indicative of future results.
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Halyard’s Weekly Wrap – 3/10/23
/in Weekly Wrap/by halyardFriday can be best summed up in the words of Ron Burgundy – “Boy, that escalated quickly… I mean, that really got out of hand fast.”
With Chairman Powell’s testimony before Congress coming just two days before the belated release of the February employment, we expected volatility in the capital markets to spike, but not to the extent that it did on Friday morning. The market panicked when news broke that Silicon Valley Bank (SVB) was experiencing a mass exit of depositors and it’s plan to raise capital through a secondary equity sale had failed. While the bank is on the smallish side, investors panicked and sold bank stocks in a classic “sell the rumor” fashion. Despite the FDIC’s takeover of SVB. The XLF bank ETF fell more than 8% this week, and we wouldn’t be surprised if it took a week or two for financial stock prices to bounce back.
Halyard’s Weekly Wrap – 3/3/23
/in Weekly Wrap/by halyardIt was fleeting, but for a few hours on Thursday the 30-year bond traded above 4.0% as bond investors debated whether the Fed has again fallen behind in battling inflation. The bout of selling reversed itself on Friday, with the long bond closing out the week unchanged. Fed Fund futures, on the other hand, continue their upward march and are now forecasting a peak rate of 5.45% in September of this year.
Halyard’s Weekly Wrap – 02/24/23
/in Weekly Wrap/by halyardThis holiday shortened week was free from the wild, unexpected economic data we’ve been seeing since the start of the year. Activity continues to surprise to the upside as has the inflation backdrop. Existing home sales fell -0.7% from last month’s measure, while the second look at Q4 GDP was revised lower to 2.7% from 2.9%. The most eye-popping of the week’s data, the Personal Consumption Expenditure price deflator, the Fed’s preferred measure of inflation, rose 5.4% year-over-year. That measure, when paired with the above expectation CPI released mid-month has taken the steam out of the nascent bond rally that started the year.
Halyard’s Weekly Wrap – 2/17/23
/in Weekly Wrap/by halyardThis week’s economic data was far worse than we had feared! We had hoped that 400 basis points of rate hikes would have slowed the economy and eased the rate of inflation, but to no avail. The January consumer price index, month-over-month, registered 0.5%, and 6.4% on a year-over-year basis, outpacing consensus expectations.
Halyard’s Weekly Wrap – 2/10/23
/in Weekly Wrap/by halyardAs we wrote last week, the tone of Chairman Powell’s comments during the post-FOMC press conference left observers with the sense that the Fed was close to a peak in the overnight rate. That view was immediately undone on Friday when the BLS reported that 517,000 jobs were added to the economy in January. Certainly not the outcome expected of an economy teetering on the brink of recession. To counter Powell’s comments, Fed speakers this week resounded their hawkishness. The “jawboning” worked with the 2-year note rising 40 basis points from last week’s low yield. The 30-year yield also rose, but by about half of the 2-year move. The overnight/30-year spread remains inverted and is closing the week at about -80 basis points. As we’ve mentioned before, an inverted yield curve has a negative cost of carry for levered investors. The risk is that those investors tire of the expense and exit the trade causing long rates to rise. Effectively, it’s the inverse of a short squeeze. That realization may have played a role in the disastrous 30-year auction on Thursday. Treasury notes and bonds trade on a when-issued basis for a number of days prior to being auctioned. The practice is useful in that it gives investors a strong idea of the yield level at which the new issue will clear. Yesterday’s 30-year auction had a 3.2 basis point tail. That was a disastrous outcome and equated to about a half point repricing on the bonds bought just before auction.
Halyard’s Weekly Wrap – 02/03/23
/in Weekly Wrap/by halyardWe thought the lead story for this week was going to be the less hawkish, post-FOMC press conference, but in fact it’s the January employment report. Economists had been forecasting that the economy would add 188,000 jobs in January and the unemployment rate would tick up to 3.6%. Given the increasing number of layoff announcements since December, we thought the actual release would have been about half of the expectation. Instead, the economy generated a staggering 517,000 new jobs during the month and the unemployment rate ticked down to 3.4%. There was no weakness in any of the subcomponents and, to be honest, the report was bewildering.